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Mainstream, VOL LIII No 1, December 27, 2014 - Annual Number

FDI increase in Insurance is Anti-National

Saturday 27 December 2014, by Rajindar Sachar

The Modi Government has decided to introduce a Bill to allow increase of FDI from 26 per cent to 49 per cent in insurance. Outwardly the Congress and the other constituents of the erstwhile UPA Government are threatening to oppose it—though ironically, it was opposed by the BJP when the Congress-led UPA Government proposed it earlier. The enormity of the hypocrisy by both the major political groups hits you in the eye.

In 1956, the Congress, to strengthen its position in the 1957 general elections in India, nationalised about 250 private Life insurance companies and formed the Life Insurance Corporation (LIC), a totally owned government corporation, the justifi-cation being the interest of small persons as expounded by C.D. Deshmukh, the then Finance Minister, who said insurance in a developing country must be seen as an essential service which a welfare state should provide to its people and not as a business proposition or additional source of investment to those who put their money in the stock market. The capital contribution of the government in the LIC was a mere Rs 5 crores.

When the general insurance was nationalised in 1973, Y.B. Chavan, the then Congress Finance Minister, declared:

This step has been taken to serve better the needs of the economy by securing development of general insurance business in the best interests of the community and to ensure that concentration of wealth does not result in common detriment.

However, in 2002 the BJP Government permitted private companies with 26 per cent FDI in the insurance sector. In 2011 the Congress-led UPA Government wanted to increase FDI in this sector to 49 per cent but the parliamentary Standing Committee headed by Yashwant Sinha, the BJP leader, opposed it and the proposal was defeated.

It is therefore rather intriguing why the BJP Government now wants to increase FDI in this sphere. This cannot be justified by saying that the proposed 49 per cent increase in FDI will bring any further foreign money funds to be used by India in road and house building sectors. The income raised by the insurance companies is all local, the premium which an average insurer pays—the result will be that the profits will be increased to 49 per cent instead of 26 per cent for foreign investors without creating any asset in India.

It is not as if the LIC has not given expected results. Those favouring increase in FDI falsely claim that it will lead to more penetration of insurance in the backward rural areas. The government has not stated that that will be the inherent conditionality of increase in FDI to 49 per cent that these companies will operate in rural areas so as to get 75 per cent of the total premium from the rural areas and the failure to do so will invite penalty. In fact the private sector in insurance is not interested in life Insurance business because of the small quantum of profit. This is shown by high lapses of life insurance in the case of private companies ranging from as much as 36 per cent to 51 per cent in some cases, while the LIC has only five per cent lapsed policies.

The penetration of life insurance in India under the LIC in 2011 (3.4 per cent) compares favourably with the USA (3.6 per cent); and Germany (3.2 per cent). The same situation was in 2012 — India (3.2 per cent); Germany (3.1 per cent), and the USA (3.7 per cent) which have private life insurance companies.

The argument that the public sector is a drag on the economy is a calumny. In the USA, one private life insurance company goes into liquidation every month. Over 370 general companies became insolvent during the 1982-2000 period. Even Lloyds of London, supposed to be the last word on stability and solvency, suffered a loss of over $ 38 billion in 1991.

The lesson to be drawn from the economic crisis in the USA and Europe is clear, namely, that it were the oligarchic financial institutions that were chiefly responsible for it. The latest financial disaster in the USA relates to the case of J.P. Morgan, Chase Bank, the largest in the US by assets, which faces multiple investigations and $ 5.8. billion loss on the wrong-way bets on credit derivates. Ironically both the UPA and BJP Central governments still feel that the talisman for growth is in permitting these very foreign insurance/banks unchecked entry into Indian markets.

The loss that the government funds are going to suffer are immense. Before 2002, when private insurance was again permitted, vast sums were paid to the government. The LIC made an investment of Rs. 7000 crores in the Sixth Plan and Rs 56,097 crores the Eighth Plan. A sum of Rs 30,000 crores in insurance funds was earmarked for infrastructure development as part of the Ninth Plan. It distributed to policy-holders a bonus of over Rs 3700 crores in 1996-97; it rose steadily from Rs 2250 crores in 1992-93.

In a developing country like India, public sector is the only instrument through which the social sector can be strengthened. The gross direct premium even in general insurance projected for 2030 AD is Rs 13,000 crores. No amount of this fund will be available for public use if privatisation takes place—the money will go to the private investors.

Increase in FDI is falsely projected as bringing in new techniques to increase the funds available. The argument that the increase in FDI will lead to more competition and will result in better service to consumers is a hoax. The reality is that in 2000 there were 3500 general insurance companies in the USA but only 15 (0.4 per cent) of them controlled 50 per cent of the market. Six per cent together control 95 per cent. So the slogan of competition in the private economy is most cynical.

In the USA in the nineties a Senate Sub-committee report on rising insolvencies of insurers, submitted to the House of Representatives, had detailed the “scandalous mismanagement and rascality of private operating insurance companies and ill-effects of frauds and incompetence leading to bankruptcies among 50 large-sized companies in the course of the last five years”.

Insurance is not a sophisticated industry which may require the involvement of multinationals in order to obtain the latest technology. We should heed the warning given by the UN Under Secretary-General for Economic and Social Affairs “that the world’s economic system was alert enough to protect the rich but too tardy to protect the poor and that the goal was not to have a global economy that ended up as a welfare state of the rich. Rethinking was needed on how to make the system more equitable and mindful of long-term concern.”

The author, a retired Chief Justice of the Delhi High Court, was the Chairperson of the Prime Minister’s high-level Committee on the Status of Muslims and the UN Special Rapporteur on Housing. A former President of the People’s Union for Civil Liberties (PUCL), he is a tireless champion of human rights. He can be contacted at e-mail: rsachar1@vsnl.net/rsachar23 @bol.net.in